Author: Dr. Veronika Papp
The Hungarian National Bank (“MNB”) recently published a Recommendation on automatic portfolio management services for unit-linked life insurance products.
The Recommendation concerns, inter alia, the development and operation of service strategies aimed at loss limitation, time-based investment or profit-taking, the provision of information to customers and the related internal regulation of insurance market participants offering the service. The Recommendation sets out expectations for both insurers and insurance intermediaries.
The Recommendation defines an automatic portfolio management service ("APMS") as a service whereby an insurer initiates a transfer (or re-direction) between asset funds based on a contract with a policyholder and without further direct instruction from the policyholder, upon the occurrence of specified events.
When requesting an APMS, the policyholder can choose from a range of portfolio management strategies and objectives offered by the insurer, by adjusting certain parameters according to his own needs and risk appetite. The Recommendation acknowledges that the characteristics of the APMS shall be defined by the insurers, however the policyholders must be informed in detail beforehand. In relation to the choice of parameters, the Recommendation considers as good practice if the advice of the insurer or the intermediary for investment life insurance includes interpretation of the information necessary for the client to choose the parameters. The MNB justifies this expectation by stating that "the customer cannot be expected to make an independent decision on the setting of the parameters of the service according to his own needs and risk tolerance", i.e. the customer cannot know what he/she wants and what he/she can afford. While in contractual disputes the court practice does not accept the "I signed without reading" or "I signed but did not understand" type of argument, the above quoted sentence of the Recommendation puts this issue in a different light.
The MNB recommends to include in the APMSs asset funds that have an aggregated risk indicator with a numerical scale of 1-7 as indicated in the Key Investor Information Document (KID) for investment life insurance.
The Recommendation also describes some portfolio management strategies, such as stop-loss, start-buy and take-profit services, without claiming to be exhaustive. In the case of loss-absorbing, clients' money is transferred to a safer asset fund and, if they have a contract for this, they can even continue to receive their future regular fees from this fund (referral).
The MNB expects the insurer or the insurance intermediary to provide detailed information on the main features of the APMS service before offering (e.g. information on liability, costs). Insurers are also expected to make public on their websites all documents related to APMSs. And where a market event has led to a conversion/reallocation by the APMS, insurers should promptly provide their affected customers with all relevant information.
In the event of the introduction of an APMS, the MNB's Recommendation also sets out expectations regarding the internal controls and procedures of insurers. Thus, the insurer's internal control body should regularly check whether the APMSs are applied in accordance with the contractual terms and conditions and should also check the back-testing carried out in the context of the sectoral monitoring. Particular attention should be paid to ensure that ongoing transactions do not prevent new operations from being carried out and that customer requests are not backlogged.
The MNB Recommendation will apply from 1 January 2022.
Details of the MNB Recommendation can be found in Hungarian language here.
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